The Analysis of Indonesia’s Current Account Balance Deficit of 2018 to 2022 Period
Rika Kaniati 1, Murti Widyaningsih1*, Adi Nugroho1
1 Faculty Economic and Business, Universitas Pancasila, Jakarta, Indonesia
*Corresponding Author: [email protected] Accepted: 15 November 2022 | Published: 1 December 2022
DOI:https://doi.org/10.55057/ijaref.2022.4.4.9
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Abstract: One of the current developments in world economic conditions is an open economy, which involves engaging in international trade (Exports and Imports) of goods and services as well as capital with other countries. In an open economy, there are four components of national income, namely consumption, investment, government spending and the trade balance.
International transactions of the countries of the world are recorded in the balance of payments. This study aims to analyze the causes of Indonesia's current account balance to continue to be in deficit, find out the policies set by the government to overcome this and find out the results of the implementation of these policies on changes in current account balance conditions. This study uses descriptive quantitative research methods, while the data collection techniques are carried out by exploring secondary data from Bapenas, Bank Indonesia, the Central Bureau of Statistics and other written sources both in the form of statistical data, research journals that have been carried out by previous researchers and other written sources. books reference books related to research. The results of the study show that the cause of the current account deficit during the period 2018 to 2022 is due to the high import compared to exports both in terms of the flow of goods and services, this is because domestic production has not been able to meet domestic needs so to fulfill it must be done by means of imports. In addition, the current account deficit was also caused by global factors, namely the weak global economy and war. Meanwhile, the Government's policy in overcoming the current account deficit has not been optimally focused on industry. The weakening global economy can be a business opportunity for Indonesia to further increase exports.
Keywords: Deficit, Balance Sheet, Current Account
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1. Introduction
One of the current developments in world economic conditions is an open economy, which involves engaging in international trade (Exports and Imports) of goods and services as well as capital with other countries. In an open economy, there are four components of national income, namely consumption, investment, government spending and the trade balance (Feenstra, Robert C, 2014). While Mankiw 2010 in (Ginting, 2020) argues that most of the world's economy is an open economy; exporting goods and services abroad and borrowing and lending on world financial markets. International transactions of world countries are recorded in the balance of payments. The balance of payments is a system of accounting for all receipts and payments as indicated by the movement of funds between a country and foreign countries, while for transactions involving goods and services produced it is called the current account
and the difference between exported and imported goods. or net receipts of trade is called the trade balance.
The current account balance is a measurement method that is quite commonly used in order to determine the dynamics of a country's international trade. The current account balance is a record of trade, investment income, and transfers between countries and around the world (Gerber, EM., Lewis, DR., & Easterday, 2014). Its value is an important aspect that should be considered in any policy formulation by the government and will determine the direction of the country's economic policy, especially in terms of macro-scale policies. Therefore, the current account balance of a country must be equal to net foreign investment, the increase in foreign financial assets is reduced by the country's foreign financial obligations (Pugel, 2007). If the value is positive, it means that the country is spending less than its total income and accumulating asset claims around the world. If the value is negative, domestic spending exceeds income and countries from around the world (Carbaugh, 2007). Net borrowing by the government is equal to its budget deficit i.e. excess spending (G) over taxes (T), while net private sector borrowing is equal to excess private investment (I) over private saving (S). So the current account deficit is indicated by the difference between expenditures and taxes plus excess Private investment minus private savings can be formulated by (G-T) + (I-S). This means that the current account deficit is a macroeconomic phenomenon that reflects the imbalance between government spending and taxes and the imbalance between private investment and savings.
Figure 1: Indonesia’s Current Account Balance Chart Source: Bank of Indonesia 2021
Indonesia's current account balance began to run into a deficit since 2012, where since the 4th quarter of 2011 its value began to decline to a deficit and continued to be consistently negative until the 3rd quarter of 2018 which reached 3.4% of total GDP (Fahmi, 2020). Indonesia experienced its first current account deficit in early 2012, where the trade balance deficit of US$ 1.7 billion resulted in a current account deficit of 2.6% of total GDP. The current account balance recorded the largest deficit in 2018 reaching US$ 31.1 billion. The current account balance in the second quarter of 2019 reached US$ 8.44 billion or around 3.04% of GDP. This figure is higher than the previous quarter which only reached US$ 6.97 billion or around 2.6%
of GDP and the same quarter the previous year of US$ 7.95 billion or 3.01% of GDP (Safitri, 2014).
According the condition of Indonesia's current account balance which continues to run into a deficit, it makes researchers interested in conducting research to analyze the current account balance for the period 2018 to 2022, what are the actual factors that can cause a current account deficit in Indonesia and what policies can be implemented taken by the government that can be implemented to address the situation.
2. Methodology
This study uses descriptive quantitative research methods. Descriptive quantitative research method is a method that aims to make a picture or descriptive about a situation objectively using numbers, starting from data collection, interpretation of the data and appearance and results (Arikunto, 2012). While the data collection technique is carried out by exploring secondary data originating from Bapenas, Bank Indonesia, the Central Bureau of Statistics and other written sources both in the form of statistical data, research journals that have been carried out by previous researchers and reference books related to study.
3. Discussion
The causes of Indonesia’s Current Account Deficit
The main cause of the increase in the current account deficit was the surge in imports of goods by 20.7 percent, while exports of goods only increased by 7 percent. The oil deficit (crude oil and fuel) jumped 37 percent from US$14.6 billion in 2017 to US$20.0 billion in 2018 (Jumiana, 2014). The deficit in the oil and gas sector is not the main cause of the deficit in the current account balance. However, this is mostly due to a deficit in the non-oil and gas sector. The main cause of the high increase in the trade deficit apparently came from a sharp decline in non-oil and gas trade transactions (Sihombing, 2021). The non-oil and gas trade surplus experienced a high decline of 81.4 percent, from 20.4 billion dollars in 2017 to only 3.8 billion US dollars in 2018. In 2018, exports still recorded a growth of 6.7 percent compared to the previous year. Imports increased much faster by 20.2 percent or three times the growth of exports. Not only soaring oil and gas imports, but also non-oil and gas imports. The difference is relatively thin, respectively 22.6 percent for oil and gas and 19.7 percent for non-oil and gas (Pramono et all, 2019).
Figure 2: Graph of Oil and Gas Trade Deficit Increased Sharply in 2017-18
Figure 3: Graph of Oil and Gas Deficit Soared, Non-Oil and Gas Surpluses Dropped Sharply
Another factor that is also cause the deficit is the existence of infrastructure development which is mostly carried out by the government. This is due to the high demand for heavy equipment and certain raw materials which are all obtained from imports (Hamidi, J., & Lutfi, 2021).
Another factor that causes a deficit is the existence of sugar imports, Indonesia is the largest sugar importer in the world. BPS data shows that Indonesia's sugar imports in 2018 reached 4.63 million tons, so for the whole of 2018 (Maghfiroh, 2021). Sugarcane-based national sugar production is far from sufficient for national sugar needs. However, the sale of rawsugar import licenses, which are the raw materials for producing refined sugar domestically, exceeds the needs of the food and beverage industry.
Beside the sugar, other products that also cause high imports are rice and salt. Rice imports during January-November 2018 increased by more than 600 percent, from only 0.3 million tons in 2017 to 2.3 million tons in 2018. Imports of salt started from the Ministry of Industry.
With the reason for the scarcity of salt, the government issued a Government Regulation (PP) which no longer requires import recommendations from the Ministry of Maritime Affairs and Fisheries. Import recommendations from the Minister of Industry are sufficient. Immediately, the Minister of Industry issued a recommendation for salt imports for each company complete with the number of quotas for each import volume (Basri, 2019).
The decline in the current account deficit in 2019 could be a sign of a slowdown in Indonesia's economic growth in 2020. Referring to data from Bank Indonesia, Indonesia's current account deficit narrowed to US$30.4 billion, equivalent to 2.72 percent of total gross domestic product (GDP) compared to 2018 achievement of US$30.6 billion or 2.94 percent of GDP. When the current account deficit is reduced, import performance will follow a decline (Fitriani, 2020).
The impact if imports fall will make the economy slow down. The four elements that make up the current account deficit have shown positive growth.
Indonesia's deficit condition can still be endured even though the deficit has widened to 3 percent. This is done so that the performance of imports can increase so that the domestic economy can improve. In addition, it is very possible for the business world to increase imports amid the strengthening of the rupiah against the United States (US) dollar. This can be done with the help of Bank Indonesia to strengthen the rupiah. If the rupiah exchange rate against the United States (US) dollar becomes more competitive, business actors can buy raw materials and capital goods cheaper. The target is not for the export market, but for boosting the domestic economy.
In 2019, there was a decrease in the current account deficit. The decline in the current account deficit was mainly due to a decrease in the services account deficit and an increase in the secondary income account surplus. The decline in the services account deficit was mainly influenced by the increase in the travel service surplus in line with the increase in the number of foreign tourist arrivals and the decline in imports of freight services. The increase in the secondary income balance surplus was in line with the increase in receipts of remittances from Indonesian migrant workers. Meanwhile, the non-oil and gas trade balance surplus declined, mainly due to a decline in non-oil and gas exports. Non-oil and gas imports also declined although more limited, with imports of capital goods and raw materials still at high levels in line with increasing production and investment activities. The current account deficit indicates that foreign exchange (forex) receipts from exports are lower than the need for foreign exchange for imports. This condition makes Indonesia much dependent on foreign funds to the capital market to meet foreign exchange needs. As a result, when there is pressure on the outflow of foreign funds from the capital market, the rupiah exchange rate weakens (Ministry of Communication, 2022).
Some factors that led to a decrease in the deficit in the current account balance in 2020 were due to, first, the improvement in exports in line with the surplus in the trade balance. This is in line with the increase in demand from China, especially steel, tin and paper. Export performance was better than expected. Second, import demand is still weak because it is related to weak economic activity and the business world. With low imports affect a low transaction deficit. Third, the impact of the large service sector deficit, especially in two major components, namely transportation costs and insurance on imports. If imports are low, these two components must be low. In addition, the low deficit in the service account was influenced by overseas tourism and this year's umrah and hajj trips were cancelled. There was also a decline in the country's foreign exchange reserves in the tourism sector (Mahi, 2019).
Government Policy to overcome the current account deficit
The current global economic development has given high dynamics to the current account and currencies in many countries, including Indonesia. In 2018, the government's efforts to control Indonesia's current account deficit were by conducting a review of the Government's infrastructure projects, especially national strategy projects, implementing the use of Biodiesel (B-20) to reduce imports of diesel fuel, as well as conducting a review of Income Tax policies.
on imported consumer goods to encourage the use of domestic products. The government has reviewed the goods regulated in Minister of Finance Regulation (PMK) 132/PMK.010/2015, PMK 6/PMK.010/2017 and PMK 34/PMK.010/2017. The review process is carried out jointly by the Coordinating Ministry for Economic Affairs, Ministry of Finance, Ministry of Industry, Ministry of Trade, and the Office of the Presidential Staff. The review is carried out by considering the category of consumer goods, the availability of domestic production, and taking into account the development of the national industry. The results of the review concluded that it was necessary to adjust the Article 22 income tax rate for 1,147 tariff posts with the following details (Ministry of Finance, 2020):
1) 210 kinds of commodities, the rate of PPh 22 increased from 7.5 percent to 10 percent.
Included in this category are luxury goods such as CBU cars, and large motorcycles.
2) 218 kinds of commodities, the rate of PPh 22 increased from 2.5 percent to 10 percent.
Included in this category are all consumer goods, most of which can be produced domestically, such as electronic goods (water dispensers, air conditioners, lamps), daily necessities such as soap, shampoo, cosmetics, and cooking/kitchen utensils.
3) 719 kinds of commodities, the rate of PPh 22 increased from 2.5 percent to 7.5 percent.
Included in this category are all goods used in the consumption process and other
purposes. Examples include building materials (ceramic), tires, audio-visual electronic equipment (cables, speaker boxes), textile products (overcoat, polo shirt, swim wear).
4) The policy to control imports through Income Tax policy it is not the first time the Government has implemented a policy. The government has implemented a similar policy in 2013 and 2015. In 2013, the government issued PMK Number 175/PMK.011/2013 also in order to control imports after the Taper Tantrum. At that time, the government raised the Article 22 income tax rate on 502 consumer commodity items from 2.5 percent to 7.5 percent. In 2015, the Government continued this policy by issuing PMK number 107/PMK.010/2015. Through the PMK, the Government increased the Article 22 Income Tax rate on 240 consumer commodity items from 7.5 percent to 10 percent on certain consumer goods whose Sales Tax on Luxury Goods (PPnBM) was abolished.
5) Payment of Income Tax Article 22 is an advance payment of Income Tax which can be credited as part of the payment of income tax payable at the end of the tax year.
Therefore, the increase in the PPh 22 rate in principle will not burden the manufacturing industry. In order to support the Government's policies in mitigating the impact of global economic volatility, the Ministry of Finance will continue to simplify tax and customs administration. The synergy between DGT and DGCE will continue to be directed at improving services and compliance levels that support the growth of the domestic industry. One of them is through the acceleration of restitution services, especially for business actors who have a good reputation. Meanwhile, import control measures through the increase in Article 22 import Income Tax (PPh) tariffs are only a short-term effort to reduce the deficit. "This is not the most optimal for maintaining stability.
6) In 2019, the Government made a number of efforts to reduce the current account deficit (CAD). Deputy for Macroeconomic Coordination and Finance of the Coordinating Ministry for the Economy Iskandar Simorangkir said that to suppress the CAD, the government was trying to encourage exports and reduce dependence on imports. This step is carried out through the development of pioneer industries that are from upstream to downstream. Thus, the industry can meet domestic needs through import substitution through increased investment to strengthen the industry from upstream to downstream through the policy package previously issued by the government. These policies include the issuance of an Online Single Submission (OSS) to simplify the licensing process in one place, and to invite business actors to invest. Furthermore, providing tax holidays for pioneer industries, relaxing the Negative Investment List (DNI), and improving Ease of Doing Business (EODB), as well as fixing connectivity to reduce logistics costs through infrastructure development. Iskandar added, to overcome the current account deficit, domestic market empowerment also needs to be encouraged as part of import substitution. This will help economic growth as well as overcome the weakening global demand.
To overcome the current account deficit in 2020 to 2024, the Government has included it in the 2020-2024 National Medium-Term Development Plan (RPJMN). The current account deficit in the 2020 to 2021 period is caused by the trade balance which is still in deficit or the surplus is still small. Therefore, the government has formulated efforts to increase exports, both exports of natural resources and manufactured products. In addition, service exports will also be increased by encouraging ship transportation services. This is expected to improve Indonesia's service balance performance.
The Results of Government Policy Implementation on Changes in Current Account Conditions.
In terms of import control, one of the programs that excels is B20 (20% vegetable oil mixed diesel fuel and 80% petroleum diesel). The policy, which took effect on September 1, 2018, is projected to reduce imports of diesel by 6 million kiloliters this year. The government must immediately accelerate the distribution of B20 (EBTKE Public Relations, 2019). For this reason, adequate supporting infrastructure is needed, in this case to ensure the supply of the main B20 raw material, namely fatty acid methyl esters (FAME) from producers. This provides opportunities for producers. The existence of FAME storage facilities in Balikpapan (East Kalimantan) and Tuban (East Java). Another thing that is no less important is to socialize the urgency of using B20 to various groups. Moreover, there is a growing stigma that B20 can damage motor vehicle engines. The government can cooperate with brand holder agents (APM) to jointly convince consumers to use B20 (Mursiti et al., n.d.).
In the future, there is nothing wrong if the government evaluates and exercises regarding imported products that can be inhibited through the imposition of import PPh. The business world hopes that this policy will not disrupt the domestic economy, which still requires imports of capital goods and auxiliary goods. Then, to increase exports, the government's decision to simplify the export process for CBU motor vehicles from February 1 is indeed commendable, because it also overcomes one of the problems in terms of logistics for the short term (Sukarno, 2019).
In the medium to long term, diversification of commodities and Indonesian export markets will be a must. Especially in the midst of a trade war that is still filled with uncertainty as it is now, there is room to hoist exports to new markets (Dinisari, 2019). The contribution of manufacturing to the structure of the national GDP is now only 19.86%. Of course, the main emphasis is on the natural resource-based, export-oriented, and labor-intensive manufacturing sector. All of this of course requires reliable human resources (HR) (Ministry of Foreign Affairs, 2019).
In 2019, government policies are expected to force the Indonesian economy to adopt a production based economic structure or tradable goods (real sector), particularly to improve the manufacturing industry sector. Government to support the Tradable Sector, especially the Manufacturing Industry (Suwardi, 2020).
The influence of government policies in overcoming the current account deficit through the Article 22 Income Tax rate policy, led to a decline in sales. One of the most impacted on this policy is the Automotive Industry. The adjustment of the price policy issued by the government, provided the policy was a decrease in sales. One of the industries affected by this policy is the automotive industry.
4. Conclusion
1) The current account deficit during the period 2018 to 2022 was caused by high imports compared to exports, both in terms of the flow of goods and services.
2) The high import of Indonesia is due to the fact that domestic production has not been able to meet domestic needs so that it must be done by means of imports.
3) The current account deficit was also caused by global factors, namely the weak global economy and war.
4) Government policy in overcoming the current account deficit has not been optimally focused on industry.
5) The weakening global economy can be a business opportunity for Indonesia to further increase exports.
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